By Paul R. La Monica
Add asset manager PIMCO to the growing list of top investment firms becoming increasingly bullish about the 2025 outlook for Wall Street. Thank the Federal Reserve, the coming Trump administration, and the Republican-controlled Congress.
Even though some investors worry that the S&P 500, currently trading at nearly 22 times 2025 earnings estimates, is starting to look frothy, PIMCO portfolio managers Erin Browne and Emmanuel Sharef say stocks still have more upside thanks to growing hopes for a soft landing and that bonds remain attractive too.
"Economic activity has been the dominant driver of equity returns during rate-cutting cycles," Browne and Sharef say in a report published Wednesday. "If economic activity stays buoyant, rate cuts have potential to boost stock valuations."
The two PIMCO managers add that "as major central banks lower interest rates, both equity and bond markets are positioned to benefit." They added that "high quality core fixed income should be especially well-positioned."
As for stocks, Browne and Sharef said investors need to recognize that while lower corporate taxes, fiscal stimulus, and a more relaxed regulatory environment could serve as a tailwind, some of those benefits promised by Donald Trump during his campaign may be offset by the President-elect's higher tariffs.
With that in mind, the PIMCO managers wrote that "investors may want to consider U.S. companies that don't rely as heavily on imports...as well as those likely to be buoyed by deregulation and more favorable tax policies."
Other financial experts are also bullish on these themes. Tom Hancock, head of focused equity and quality portfolio manager for GMO, told Barron's that he thinks financials should benefit from lower rates and Trump's focus on stimulating the U.S. economy. He likes Wells Fargo and U.S. Bancorp.
Hancock added that even though tech stocks could get hit in a Trump trade war scenario, investors can still find opportunities with tech firms that are benefiting from more nearshoring and onshoring, such as chip giant Texas Instruments.
Trump's focus on domestic manufacturing should also be good news for industrial stocks, says Shelby McFaddin, senior research investment analyst with Motley Fool Asset Management.
McFaddin says her firm owns concrete and asphalt giant CRH, which should benefit from any increasing funding to rebuild transportation assets and other infrastructure. "Everyone agrees we need new roads and bridges," she says. McFaddin adds that she's also now taking a closer look at engineering and consulting firm Jacobs Solutions in the wake of the red sweep in Washington.
On the bond side of the equation, it's a little trickier. Some experts said that higher long-term yields could be in the cards given the possibility of any fiscal stimulus -- and tariffs -- fueling resurgent inflationary pressures.
"There is a bias to the upside for yields but we're comfortable extending duration," says Andrew Krei, co-chief investment officer with Crescent Grove Advisors.
Still, he adds that "the idea that there could be whiplash in the bond market from significant fiscal stimulus is a real possibility." That might impact Treasuries more than other parts of the bond market though. As such, Krei says he likes both investment-grade and high-yield corporate bonds. "More stimulus and a stronger economy is supportive of credit," he says.
Erik Aarts, senior fixed income strategist with Touchstone Investments, agrees. Aarts tells Barron's that high yield in particular could be a winner in 2025 "if the economy remains resilient, inflation moderates and we get tailwinds from fiscal and monetary policy." Aarts adds that high-quality municipal bonds are attractive as well.
The key is to have a solid mix of both stocks and bonds heading into next year. Diversification is still a winning strategy.
As PIMCO's Browne and Sharef note: "Staying invested in core, high-conviction trades within a well-balanced portfolio can help investors achieve target objectives while navigating unexpected twists ahead."
And if the second Trump presidency is anything like the first, it seems like unexpected twists are a safe bet for 2025.
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 20, 2024 14:37 ET (19:37 GMT)
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